- President Trump says trade deal is close but Dec 15 deadline is approaching
- U.S. core PCE deflator expected to remain tame
- U.S. Q3 GDP expected unrevised
- U.S. durable goods orders expected to remain weak
- T-note auction deluge concludes today
President Trump says trade deal is close but Dec 15 deadline is approaching — President Trump on Tuesday expressed optimism about a trade deal and said, “We’re in the final throes of a very important deal. It’s going very well.”
Mr. Trump’s comments followed a high-level phone call on Monday night among Lighthizer-Mnuchin and Chinese Vice Premier Liu where they discussed “core” issues. China’s Ministry of Commerce said after the call that China and the U.S. “reached consensus on properly resolving relevant issues” and agreed to stay in contact on the remaining points for a phase-one trade deal.
On the less optimistic side, White House adviser Conway on Tuesday said some sticking points remain on the phase-one trade deal and that negotiators are still dealing with technology transfers.
President Trump on Tuesday gave no indication whether he will sign the Hong Kong bill passed by Congress last week. China has threatened unspecified retaliation if President Trump signs the Hong Kong bill, which could include disrupting the US/Chinese trade talks.
The markets remain optimistic that a trade deal will be completed as seen by the fact that U.S. stocks rallied to record highs as recently as yesterday. However, the Dec 15 deadline is now only 2-1/2 weeks away when President Trump has said he will slap a 15% tariff on the remaining $160 billion of Chinese goods. If there is no deal by Dec 15 but the talks are still making progress, the markets are hoping that Mr. Trump will delay the Dec 15 tariff.
U.S. core PCE deflator expected to remain tame — The market consensus is for today’s Oct PCE deflator to rise slightly to +1.4% y/y from Sep’s +1.3% and for the core deflator to be unchanged from Sep’s +1.7% y/y. The PCE deflator is the Fed’s preferred inflation measure.
The headline and core deflators are in tame shape and are comfortably below the Fed’s +2.0% y/y inflation target. Indeed, the deflators are even weaker on a 3-month annualized basis at +1.1% for the headline index and +1.6% for the core index. Inflation is currently tame enough that the Fed could easily cut rates again without any objection from an inflation standpoint if the economy were to take a turn for the worse from a new round of tariffs, for example.
Meanwhile, market-based expectations for inflation are close to the current core deflator of +1.7% y/y. The 10-year breakeven inflation expectations rate, which measures the difference between the nominal and TIPS 10-year T-note securities, is currently at 1.64%, comfortably below the Fed’s +2.0% inflation target. The Fed has stressed that its inflation target is symmetrical, meaning that the Fed would not be overly worried if the inflation statistics and the breakeven rate should temporarily move above the +2.0% target.
U.S. Q3 GDP expected unrevised — The market consensus is for today’s Q3 GDP to be unrevised from the last report of +1.9% (q/q annualized). Today’s Q3 personal consumption report is expected to be revised slightly lower to +2.8% from +2.9%, but remain relatively strong.
Personal consumption continues to be the main factor supporting the U.S. economy. Personal consumption contributed 1.93 percentage points to the Q3 GDP rate of +1.9% and an even greater 3.03 points to the Q2 GDP rate of +2.0%.
The market consensus is for U.S. GDP to weaken to +1.6% in Q4, which would be below the Fed’s estimate of potential U.S. GDP growth of +1.9%. GDP is then expected to average near +1.7% in 2020 as the economy remains lackluster due to trade disruptions, weak global business investment, and slowing growth in China.
U.S. durable goods orders expected to remain weak — The market consensus is for today’s Oct durable goods orders report to show another weak report of -0.8% and +0.1% ex-transportation following the Sep report of -1.2% and -0.4% ex-transportation. Capital spending is also expected to remain weak with Oct core capital goods orders (ex defense and aircraft) falling -0.1% m/m, adding to Sep’s decline of -0.6%.
The markets will be watching to see if the U.S. manufacturing recession will worsen. U.S. manufacturing production has fallen on a year-on-year basis since August and was down -1.5% y/y in October. The ISM U.S. manufacturing PMI has been below the expansion-contract level of 50 since August and was at only 48.3 in October.
T-note auction deluge concludes today — The Treasury today will sell $32 billion of 7-year T-notes, concluding this week’s $131 billion T-note package. In some good news, bidding interest was solid for both Monday’s 2-year T-note auction and Tuesday’s 5-year T-note auction, which had strong respective bid cover ratios of 2.63 (vs the 12-auction average of 2.58) and 2.50 (above the 12-auction average of 2.37). The benchmark 7-year T-note yield on Tuesday closed at 1.69%, near the middle of its recent 5-week range and 31 bp above September’s 3-year low of 1.38%.
The 12-auction averages for the 7-year are: 2.44 bid cover ratio, $17 million in non-competitive bids to mostly retail investors, 4.4 bp tail to the median yield, 29.8 bp tail to the low yield, and 48% taken at the high yield. The 7-year is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 59.7% of the last twelve 5-year T-note auctions, which exactly matches the 12-auction median of 59.7% for all recent coupon auctions.
